You're here in the consumer track. This is the Blue Room, where we're about to hear from Sprouts Farmers Market, and CEO Jack Sinclair; and CFO Curtis Valentine. Thank you both for being here with us.
Huh.
Sprouts is obviously a leading specialty food retailer, and for the last few years have not only posted best margins in the industry, but years of the best comparable store sales and unit expansion growth. Thank you guys for being here. I wanna start right there with a sort of philosophical question about food retail. Does the competitive landscape in food retail allow for someone to sustainably have the best margins and the best growth at the same time?
Yes.
You've done it.
We've carved a niche in the marketplace, and that niche is what's protected us from some of the broader context of the grocery market. The fact that we're focusing in on health enthusiast customers, and there's a trend towards that, and maybe we talk about that later a little bit about how the MAHA world's accelerating the whole health trends. We think there's a lot of positive trends behind what we do. The question you asked, Bill, around how sustainable is our margins. Our margin structures are sustainable because of the assortment differentiation that we have in that we're not comparing like for like. A lot of grocery stores are selling exactly the same things as everyone else, which puts inevitable gross margin pressure on that.
We've got an opportunity to forge our own path in the middle of that space by having differentiation. We also the margin profile that we've had is sustainable going forward. We're feeling very comfortable about that. Our long-term algorithm's to hold our net margins flat, and we've got plenty of opportunity to drive efficiency within our margin. Relatively young company, Sprouts, in terms of where we are in the marketplace, so that gives us opportunities in terms of shrink, in terms of self-distribution, in terms of other aspects of how we can become more efficient going forward. That gives us a kind of opportunity to keep confidence that our margin profile's sustainable going forward. Within that context, the traffic dynamic, we've
We're building a lot of stores all over the place at the moment, making a lot of success in new stores. That's bringing a lot of traffic to our business. A lot more people are getting engaged in Sprouts in the last couple of years than they ever have before as we accelerate the store program. On top of that, we've got some work to do to move. We're a little disappointed in, as we talked about in our last call, about exactly where we are regarding traffic, but we're doing some specific work. The world changed. There were some tough comparisons, and that's not an excuse. There were some tough overlaps we had to deal with, but we also looked at a tougher consumer environment.
As you look at going forward, the challenges of gas pricing and some of the dynamics that are going on at the moment, we've got to work hard at making sure our affordability, the products that we're selling, our value, and value meaning at any price point, as opposed to trying to change the profile of our price points in the business. We're focused very much on value. We think that'll help us with traffic going forward. We're very confident in our margin profile. The algorithm that Curtis and I have talked about on our calls, we're pretty confident we're in the right place to be able to deliver on that.
That was wonderful. You talked a couple weeks ago about having the P&L capacity to, you know, fund some maybe price investment. I don't know if that's the phrase you would use. You talked about having the P&L, you know, flexibility to address any affordability issues that may be out there with products. Can you elaborate on that a little bit more? You know, is that a margin versus traffic conversation? And if the elasticities don't show up as you would expect with any investment you're gonna make, then what do you do?
Yeah. Well, as I said on the outset, we've got differentiated products, so that makes the price comparisons and what you invest in a little bit different. For the world I've lived in through my career in a grocery world where everyone's got the same thing, you're always looking at everyone else's prices. We do so in produce, so we're looking hard in a very volatile marketplace, making sure our value and organic produce is significantly better than anyone else in the industry. We watch that, and that's working pretty well for us. As we look at pricing across the rest of the box, it's a little bit about making sure the products we're bringing in are at the value we want them to be bringing in. Whether it be beef tallow chips, which is on fire, would you believe?
With the market's changing. This protein trend. How do we make sure that when that protein trend comes alive, that we're at the right prices within that? That's a little bit about what we mean by our P&L sustains what we need to do. There's efficiencies we can build into our business to allow us to get exactly where we need to be in terms of these trends that are accelerating so quickly, whether it be fiber or protein. We want to be the leading edge of those, and we need to make sure we're giving value within that context of a fast-changing marketplace, a changing marketplace in terms of health, in terms of the agenda behind health, and a changing marketplace in terms of the products and innovation that's coming to the marketplace. We will win by being better at innovation than everyone else.
As part of that, we've got to make sure that innovation is priced at such a level that's affordable and that affordability challenge. We want to give more access to more people. That's why we're building a lot of stores. That's why we're working our loyalty program to try and bring more people into an agenda so that we can fulfill what our purpose is, which is helping people live and eat better. The only way we can do that is by having value within the products that we sell. It's not so much about price investments. It's about bringing real clarity to the products that we're launching and that the price points we launch them at make sense to our customers. Elasticity will tell us that. If a product's too expensive, it won't sell as well. If a product is the right price, it'll sell well.
We watch that pretty carefully, and that's. It's the world that we can operate within our world, as opposed to worrying too much about what everyone else is doing.
Yeah, just on the investment side, I mean, we've been investing in the business. A lot of inventory management, you've heard us talk about that. You first talked about self-distribution. Those are pieces that in the short term are providing that capacity. The returns from those investments are providing the capacity to do the things we need to do on affordability front. As we look ahead, the other primary investment we're making right now is in loyalty. And that's impacting the first half of this year from a margin perspective, but it unlocks opportunities in the medium and long term. That's kind of that virtuous cycle. We'll invest, we'll get some returns, we'll create capacity, and then we'll reinvest in the business, whether that's back into the infrastructure of the business or whether that's to the customer and affordability.
You know, we'll make our choices year to year based on the conditions.
The products we're launching. We're really excited about something we call Wellness Bowls, which are really, really high quality products, $7.99, $9.99, and we're really seeing some success on that, and we're really doubling down on sandwiches. The world that's happening out there in terms of the pressure that the consumer's gonna feel on gas pricing, we do feel that creates an opportunity for us to take some business from the restaurant space as people eat in-home as rather than out of home. If we again focus in on value, on products that play to the health agenda, play to the organic agenda, clean ingredients, we feel as if we've got an opportunity to take some business in the context of a tougher environment.
In areas where you've seen some traffic pressure, how important is it to identify where that traffic's going as you know, develop your plans for re-sparking your traffic profile?
Yeah, I think we've been, you know, spending a lot of time trying to understand the traffic dynamic. I think for us, what we've seen is, you know, the geographic story, the category story was pretty similar on the nice uptick we had, and then it's followed suit on the downtick. What's been different is the consumer piece of it. So having a better visibility into the customer and a little bit of the benefit of hindsight, you know, we can look back and see that it was a surge in new customers, a surge in reactivated customers that drove our business. And then our challenges are really just in growing off of that kind of new higher base of customers. We're not really losing customers in a meaningful way. It's just that we're having some challenges growing off that base.
Specifically, we're seeing the unit pressure, you know, across our high engaged and our low engaged, that choicefulness at the end of the basket, which again alludes to the consumer pressure that folks are under right now.
I imagine that choicefulness at the end of the basket, it's gotta be more discretionary type items that might be in your store. Would you expect with some of the fuel pressures that might be arriving for consumers that end of the basket remains pressured?
Yeah, I think it's very similar to what we saw in 2022 and 2023 in the first wave of inflation. Actually, I would say for us, it ends up being a little bit more in the produce space. We have quite a few units in the basket from a produce perspective, and so we talk about it managing household shrink, right? Instead of buying two punnets of strawberries, they'll buy one because they're not sure they're gonna be able to get.
He uses punnet because he keeps hearing me talking about European.
What I learned from Jack, and then he makes faces, so yeah. That's a little bit what we saw back then, and it's a little bit what we're, you know, starting to see now is again, there's just that last item in the basket is where they're making some choice, and produce tends to be one where, am I really gonna get through it or am I gonna throw it away? They get a little bit more choiceful.
A question I get a lot, and I think I know what your answer is gonna be, but we get a lot of questions about, you know, Amazon announcing they're doing new markets or, lowering minimum order size or reducing delivery times or, you know, the things that make a lot of headlines. They coincide with comp sales decelerating. Do prior years, but they coincide with your comp sales deceleration. Are the two related?
No. I think.
No.
Yes. You know, I know there's a lot, you know, the timing is tough to ignore, right? But it is. It's more about that lapping piece. It's when we started to see kind of the peak of new customers on a weekly basis is in that same window of time. Our competitive set is pretty broad. We're a complementary retailer, so there is no one dominant competitor in our share of wallet, if you will. We watch it very closely. We watch all competitors very closely, and it's gonna be a competitive landscape and a dynamic market. We're doing well. The products we sell are doing well, and that'll continue to draw attention.
For us, we believe it's in our hands to do the things that we do well, which is differentiate, innovate, great store experience, build new stores and new communities. Those are the things that are gonna drive our traffic and drive our business. We feel like we're completely in control of those, and we just have to do that really well. Then as we get through kind of this surge of customers that we went through, we start to normalize September Q4, we think we'll get back to kind of normalized comps at that point.
You talked about the loyalty program, you both dis, as a way to re-spark traffic growth. Can you maybe just set the stage for the crowd of how that loyalty program came about, where you were deficient before you had the loyalty program in terms of insights you could develop? How you can apply those today to help drive basket, drive traffic.
Yeah, the important thing is the data that's coming from the raft of customers that operate in this health enthusiast space. We were quite honest, we're flying a little bit blind without the detail. What you find is there's so many very specific cohorts within the data that we're getting from the loyalty program, whether it be vegan, vegetarian, grass-fed beef, keto, paleo, the difference between customers who are interested in gluten-free and organic. What it's teaching us is, as we, h ow do we get these cohorts together and do the right thing for those individual customers?
We've spent a lot of time, and a little bit longer than I would have liked us, to get to the point where we've got the data from the customer base and that the technical challenges of doing that took us a little bit longer than we would like. We're in the place now where we're doing a number of really interesting tests, breaking down customer dynamics in terms of taking individual customers, individual groups of customers, and stimulating the demand through different types of techniques. We're trying to. We're in the process of learning exactly what needs to happen in relatively low volume customer base that we'll be able to scale going forward as the year goes on. The key to the loyalty program for us has been, it's giving us access. Our customers love it. Our customers tend to.
That shop with us and enjoy Sprouts are very positive about the loyalty program and what it's doing for them. It's. We're giving them some value. We're thinking about different techniques to promote with them appropriately. It allows us to be much more targeted with promotions, and that's kind of the biggest opportunity we have in front of us, which back to the margin, quite helps protect the margin as well as give the right investment at the right time for the right customers. We're excited about the data. We're at real early stages on it, and we're expecting some progress on that as the year goes on.
You know, years ago, you went through a period where you refined your customer base a little bit, and I'm gonna mess up the phrasing, but, you know, you kind of didn't want the coupon clipper only types.
Yes.
In the stores. How do you prevent the loyalty program from becoming dependent on coupon clipping or promotion type activity?
Well, I think that's really getting into those sub-segmentations and cohorts and truly understanding what drives behavior. We'll know them a little better. Even in the testing we're doing, not everything we do from a test perspective is about promo. It's about sometimes highlighting the unique products we have or, you know, simple things like time of day and when we send an email and how that impacts open rates and click-through and things like that. I think we're just, you know, again, Jack said earlier, kind of flying blind in the past. That's the piece that we have now that we understand, you know, what's gonna incentivize behavior.
Instead of having to give a promo to a big wide swath of customers, you know, we can get really pretty targeted and pretty narrow with the group that we know need that promo in order to incent behavior, and then use, you know, non-promo type efforts to stimulate demand where possible too. I think that bifurcation, that sub-segmentation in the cohorts will help us do that.
Those customers that were those coupon clippers that we kind of intentionally wound down with not doing such aggressive promotions, they're not really in that loyalty base to the same extent. Our expectation, although we've still got to confirm this, is that it's not gonna be so much about promotion, it's gonna be much more about stimulating. "Here's a product you haven't heard before. Here's something new. It's 10 o'clock in the morning why don't you come and have lunch?" To those kind of stimulants, trying to get people enthused about what our assortment is and what the opportunities are and reminding people, that's the thing that we think is gonna work best for us. The promotion side of it is more kind of about tuning it to the individual cohorts.
What I think is exciting about the data is you've always been on the cutting edge of some of the health and wellness movement without all the data necessarily to tell you how the consumer might be shifting on the street. How big of a part of the data is informing your assortment decisions, like informing the product in the store?
The MAHA agenda that's happened across the country is pretty remarkable, to be honest. Someone that came to the U.S. from the U.K. where over to the U.S., where all the products that were being sold were full of additives and colorings and things that were kind of accepted across the grocery space in the United States. The fact that that's been kind of moved so far against that, it's playing into our hands a little bit. There's some legislation in Texas that was requiring some labeling that's about to say these products contain ingredients that are banned in the United Kingdom, Australia, and Canada. It's pretty remarkable that Texas would vote for that. Anyway, that was 100%, all the Democrats, all the Republicans voted for it, which I don't think happens often in Texas.
He tells me to keep away from politics. He's probably right. The remarkable thing for me is how that has been accepted across the political spectrum and our opportunity. The great thing about that legislation from Texas is not one product would we have to label. Not one product would we have to put that label on it. We're giving access to this kind of MAHA agenda product much more visibly than anyone else in the marketplace. We're gonna double down on that in terms of. We'll double down on it with our loyalty customers and the customers that understand it. There's a growing understanding of what's in our food and people understanding that food is medicine, and the fact that we don't have a pharmacy. We're pretty unique in a grocery store not to have a pharmacy.
That whole vitamin supplements and ingredients is something that we're really well placed on to double down on going forward, and we'll talk to our customers in the loyalty program about it.
Let's spend a little time on the self-distribution of meat and seafood. In 2025, your original vendor, if you will, had some disruptions. You put a temporary kind of replacement in there who also had disruptions before ultimately bringing it in-house. I guess as you go through the transitions of meat and seafood to ultimately get in into your own systems, did that impact 2025 for the category meat and seafood at all in your stores?
Yeah, certainly. I think it did have a small impact on us. I mean, we were able to effectively get the product we needed, but we didn't have enough product to promote and to go- to- market the way we normally would. We'll see a little bit of that right now and into the next couple of months where we were having those disruptions. We should see some benefit in the very near term on the meat side from being back in business, in control of it with our own self-distribution. The stores have some confidence now in the service that they're getting from our DCs, helps with the ordering, kinda smoothing that out. They're getting more deliveries, fresher product.
All those things that we anticipated from going to self-distribution are playing out in real time, and it's part of those investments we're making that are driving capacity in the P&L for the affordability piece. Pleased with that. Then when we get to the middle, in the summer, that was a piece that drove the business. As we had the cyber disruption, we were limited in that. It's not our primary distributor, and so we certainly saw some extra business, really in the June-July timeframe, and that'll be a bit of a challenge when we get to lapping that. In the very short term, we're seeing a little bit of benefit from kind of being in business and being normal state from a meat perspective.
Can you remind the group to maybe set the stage a little bit? Like how big is that category in your stores? I think the last update was it's up to 75% of the stores are being serviced by your DCs now. How do the savings and benefits that you've seen in the transition compare to what you would have expected?
Yeah, I think we're right on track from a ROI or business case perspective, right? We're not paying the distributor fees. That's really the primary benefit from it. Pay a little bit more to distribute and then a better gross margin or better cost for the merchandising team. That's played out effectively as anticipated and, you know, team's done a really good job navigating through a really challenging year as you highlighted. We're excited to be on the other side of it and kind of in full control, and that's really, you know, the benefits of self-distribution for us and those key strategic categories, particularly in fresh, it's really important for us to be in control of it and and that's kind of played itself out the way we thought it would.
The important thing about the whole program is it's given, we're delivering it alongside our produce now, so there's efficiency in that. The store managers, the store, the people running our meat departments have got much more confidence that the product they're ordering is gonna come in. That gives an opportunity in terms of both in-stock, better management of shrink, and that whole that's beginning to flow through for us. We're excited about. When you talk to our meat managers, they're the guys that are really excited because they've had a tough year trying to deal with some of the challenges we've put in front of them. That's giving us a lot of confidence that the meat business can be strong going forward.
How does bringing in that category and what you're learning from it inform how you think about other categories and whether you should do it yourself or rely on a third party?
Well, we've got good third parties supporting us, and we've got to be thankful for a lot of the work that they do. Having said that, gradually over the course of the next few years, we'll take more responsibility for our own distribution needs. We're very focused on looking at our Sprouts Brand product and taking accountability for ourselves. As we get bigger and stronger and a bigger business going forward, we need to take more responsibility for more of our own, certainly Sprouts Brand's one that we're looking pretty hard at in terms of what could we do as the next step on this. There's a number of other categories that might make some sense as well.
We're learning the replenishment side of it, how to organize, how to work with the vendor base, how to work the replenishment to the stores. We're learning a lot from the meat exercise, which will help us thinking about some other categories.
Another thing that's changed a lot over the years is the digital mix of the business, right? It was probably low single digits before COVID. It's now almost up to 16% of your sales is digital mix at year-end. As digital mix has become so much more prevalent, how do you think about opening stores, store density that's required in a market, just given that channel has become so large?
I'll let you talk a little bit, but just in terms of the omni-channel customer, we've always been of the view that we'll let the customer decide how they want to navigate to purchasing the products that we sell. We've seen some interesting trends of more pickup, which I think does link to the affordability. Our pickup business is relatively small as a percentage relative to the bigger players. What we've seen in the last few months is a fairly significant change in pickup relative to delivery, which is probably linked, as I said, to affordability. In terms of how that evolves and where we're at in the middle of that, I'll maybe let you have a go.
Yeah, I think from a store perspective, I don't think it changes dramatically our perspective on getting to over, you know, 1,000 stores, 1,200 stores is kind of what we're aiming for in the long term for the U.S. I think it changes how we approach markets. As we go into, say, Chicago here in 2027 and beyond, just thinking about spacing and thinking about where we put that first wave of stores in a new market, that reach that e-commerce has for us allows us to get to, it's kind of a 30-minute-ish trade area, drive time wise, versus our brick and mortar would be more in that 10-15 range.
Just changes a little bit the dynamics around how we think about getting into a market to start, but ultimately doesn't really change. The brick and mortar is still 85% of the business, so you know when we see you know strong brick and mortar sales in a store, it still highlights an opportunity that you could put another store pretty close by. That won't really change that part of it. It'll just be more about how we enter markets in Chicago and the Midwest, and then ultimately in the Northeast, you know, as we get to New York.
Well, I think you just opened your first New York store. I think there's a Massachusetts one on the way. Could you talk about the balance between going into what are new markets versus maybe building a little density south, where you had opened some stores in New Jersey and Philadelphia and the Mid-Atlantic?
I think balance is the right word. I think that's how we're thinking about it. It's gotta be both. If you look back over the last several years, you know, the East Coast, a lot of Florida stores, some Mid-Atlantic stores, that was kind of our new market set, and we've had about a 50/50 split between kinda newer emerging markets versus our more established markets where we're infilling with density. I think as we mature in Florida now, they kinda graduate, so to speak, into a more mature market for us where we're gonna densify, and then we're opening up the Midwest, we're opening up the Northeast. We'll kinda maintain that 50/50 split just with a little bit of different geography. I think the piece we're taking with us from a learnings perspective is really around density within a new market, right?
It's not, "Hey, get one or two stores. Let's see how it goes." We wanna get to kinda 10 stores. That's our operating district kinda model is a 10- to one DD, district director model, and trying to get those stores clustered so you get that operational efficiency, you get the marketing efficiency, you get the supply chain efficiencies. We're really focused in the newer markets going forward on kinda getting to 10 as quickly as we can to kinda build out from an awareness perspective and from an efficiency perspective.
Awesome. Before we get kicked out of the room here, Jack, maybe if you could finish just real quick, what about 2026 has you most excited?
I'm really excited about the company. I'm really excited about the team that we're building around us. We've got Nick Konat, the Chief Operating Officer, who's brought a new Chief Customer Officer in. He's brought a new Chief Merchandising Officer in. We're really investing in the team members out at the store. We're making a lot of progress in terms of when you're building as many stores as we're building a team, a talent pool, store managers. We promoted 30% of our people last year. We're really excited about the opportunities that we're creating for people right across the country, and we're building a really strong team, and that's probably what excites me the most, 'cause we've got a great purpose as a company.
We've got a great opportunity in front of us, and working with people that share that purpose is a real thrill.
Awesome. That's perfect. Thank you, Jack. Thank you, Curtis, for joining us today.
Thanks.
Thanks very much.